12/31/2009 @ 12:01AM

Republican Rigidity

It’s an article of faith among right-wingers, especially the tea party crowd, that all of the United States’ ills happen because Republicans in Congress don’t stand for principle. They believe that whenever you compromise with evil, the result is evil, so every politician should support conservatives’ principles come hell or high water, damn the torpedoes.

For example, their position on health care reform is that it’s pure evil–it’s unconstitutional for the government to force anyone to buy health insurance, to tax anyone to pay for someone else’s coverage or interfere with the free market in any way, even if people die as a consequence.

The right-wing solution to the uninsured is simply to define them out of existence. As Dr. John Goodman, one of John McCain’s health advisers, explained to the Dallas Morning News last year, “The next president of the United States should sign an executive order requiring the Census Bureau to cease and desist from describing any American–even illegal aliens–as uninsured .So, there you have it. Voila! Problem solved.” His Orwellian logic is that hospital emergency rooms are by law available even to those that cannot pay; therefore, everyone by definition has health coverage.

Putting aside the stupidity of this position, it’s unrealistic to elect 219 Ron Pauls, Michele Bachmanns or John Goodmans to the House of Representatives, plus 60 more in the Senate and a president who won’t veto their efforts–that’s what it would take to repeal the coming health reform legislation. Nevertheless, right-wingers insist that this is what they will do after the next election–and any Republican not on board can expect someone from the tin-foil-hat brigade to run against them even if it means electing a Democrat instead, as was the case recently in New York’s 23rd Congressional district.

There is no question that there are at least a few sensible conservative ideas about health reform worth considering; malpractice reform is one. And I believe that Democrats desperately wanted a bipartisan bill and would have given a lot to get a few Republicans on board. This undoubtedly would have led to enactment of a better health bill than the one we are likely to get.

But Republicans never put forward an alternative health proposal. Instead, they took the position that our current health system is perfect just as it is. I’m told that the respected health policy analyst at a major conservative think tank was prohibited from offering any criticism of the current system lest it undermine the Republican position that no change is needed.

This is not the only recent case in which the right-wing no-compromise position led to a universally bad policy. The estate tax is another example.

In his book Death By a Thousand Cuts, Columbia University law professor Michael Graetz describes how a small group of family-owned businesses banded together in the early 1990s to abolish the estate tax entirely. They established various organizations for this purpose, commissioned studies and lobbied Capitol Hill. Among their most effective accomplishments was getting every Republican to habitually refer to the estate tax as the “death tax.”

By 1997, this group was successful in raising the estate tax exemption from $600,000 to $1 million and carving out a special exemption of $1.3 million for family businesses. But this achievement did nothing to even slow down the effort for total repeal. Democrats offered to permanently reduce estate tax rates by 20% across the board, which would have reduced the top rate from 55% to 44%, increase the regular exemption by 15% and the special exemption for family businesses to $2 million.

This proposal was rejected out of hand. It was all or nothing, the Republicans demanded. In 2000, they sent a repeal bill to the White House, where it was promptly vetoed by Bill Clinton. He made it clear that he would have signed a more modest reform bill, as he had signed the 1997 measure, but was opposed to completely exempting great wealth from the estate tax–if only for revenue reasons, since the estate tax contributed $50 billion per year to the Treasury.

With the election of George W. Bush, however, the presidential barrier to estate tax repeal was removed and Republicans included it in the 2001 tax cut. But there was a problem. Because of budget rules it was impossible to permanently change the tax code. All tax changes would sunset after 10 years.

Republicans viewed this constraint as little more than an annoyance. I was told on many occasions by people such as Grover Norquist of Americans for Tax Reform, a strongly pro-tax-cut group, that Republicans would simply extend these tax cuts as necessary and that no Democrat would dare to let them expire.

For reasons I have never understood, Republicans didn’t actually repeal the estate tax. They very gradually raised the estate tax exemption to $3.5 million and reduced the maximum estate tax rate from 55% to 45%. But these provisions did not become effective until 2009. Then, in 2010, the estate tax is finally abolished, but only for one year. Because the original legislation was effective only for 10 years, starting in 2011 the estate tax goes back to exactly where it was in 2001. The exemption will be reduced to $1 million and the maximum tax rate goes back up to 55%.

I wonder if there are any rich people being kept on life support so that their deaths won’t occur until 2010, just so their heirs can save a few dollars in estate taxes. It will be even more interesting a year from now to see if there are any premature deaths among such people, assuming that the law remains unchanged. It might be prudent for wealthy people to put into their wills a provision requiring an autopsy if they should die in 2010.

In the years since 2001, Democrats have repeatedly made it clear that they were open to some sort of permanent fix to the estate tax. The current situation is absurd and makes it almost impossible to do competent estate planning. As recently as Dec. 3, Democrats passed a bill in the House that would permanently raise the estate tax exemption to $3.5 million and reduce the top rate to 45%. Every Republican voted no. Republicans in the Senate also blocked an effort to enact this legislation there as well.

Hard-liners are enthusiastic. Abolishing the estate tax even for one year is a triumph, they believe. However, those who actually have to deal with the death of a relative in 2010 may not necessarily feel that way. That is because the repeal legislation replaced much of the lost revenue by requiring that capital gains taxes be paid on estates in lieu of the estate tax.

The way the law has been historically is that assets with capital gains are exempted from the capital gains tax at death–the assets are stepped up to current values. Thus someone planning to hold an asset until death never had any reason to worry about basis for tax purposes and may not have even bothered retaining such records. But his or her heirs will now have to figure out basis in order to calculate the proper capital gains tax–and the person who purchased the assets in the first place won’t be around to help.

In 1976, Congress enacted a provision exactly like this, called carry-over basis. It was so difficult for executors to implement that Congress repeatedly delayed its effective date and eventually repealed it. In the coming year, at least some heirs will wish they had the certainty and ease of paying an estate tax for which the rules have been established for many years rather than deal with carry-over basis.

It’s too soon to say what the final resolution of the estate tax mess will be in 2010. But given Republican intransigence on the tax issue and their improving electoral prospects in November, there is a very good chance that no action will be taken on this issue and the law will stay on automatic pilot.

Personally, I won’t consider this a triumph of principle over expediency. Permanently raising the estate tax exemption and lowering the rate is a good deal, and permanent repeal is an unrealistic goal, especially given the federal government’s deteriorating finances. Those who think otherwise are living in a dream world.